A new study claims that community financial institutions,including credit unions, dramatically overpay for core systems, onaverage about 24% over “fair market value.”

Institutions in the $500 million to $1 billion range fare evenworse, overpaying by on average 29%, which amounts to roughly $1million over the course of a typical five-year contract, accordingto the study.

The research was conducted by consulting firm Business Performance InnovationNetwork in association with Paladin fs, a consultingcompany focused on core systems. The free report is availablehere.

In an interview, BPI executive Dave Murray said that in thepresent environment, financial institutions need to focus onreducing operating expenses and, according to the BPI research,fertile ground for accomplishing exactly that is core systemexpenses which, said Murray, typically are much higher thanprevailing market value rates would indicate.

Multiple factors play into this, explained Murray.

Typically, credit union executives will ask peers what they payfor core services and since most overpay – per BPI – what they hearback are inflated numbers.

Typically, too, suggested Murray, consolidation among core providers has led to reducedcompetition among the survivors.

He also said that core providers understand that most creditunions deeply fear converting to a new core – so they are less aptto make harsh demands on their provider.

When it comes to getting better pricing, Murray said BPIresearch suggested that the time to seek concessions is “around twoyears before a core contract expires.”

That gives the credit union ample time to mount a search for anew provider in case talks fail.

He stressed that there has to be some give in the talks, too,typically with the credit union offering a longer contract term, inreturn for sharply better pricing.

BPI's big point: “Most credit unions don't have the data to knowif they overpaying and by how much,” said Murray, but, he added,most are definitely overpaying and in an era of mountingcompetition that is unhealthy for an institution's lifeexpectancy.